Hanesbrands Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 12 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the Hanesbrands Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, T. C. Robillard, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good day, everyone, and welcome to the Hanesbrands quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the Q2 of 2023. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and the replay of this call can be found in the Investors section of our haynes.com website. On the call today, we may make forward looking statements either in our prepared remarks or in the associated question and answer session.

Speaker 1

These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks include those related to current macroeconomic conditions, consumer demand dynamics, our ability to in our previously disclosed ransomware incident. These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases. The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are made. Unless otherwise noted, today's references to our consolidated financial results and guidance exclude all restructuring and other action related charges and speak to Additional information, including a reconciliation of these and other non GAAP performance measures to GAAP can be found in today's news release.

Speaker 1

With me on the call today are Steve Bratsby, our Chief Executive Officer and Scott Lewis, Our Chief Financial Officer. For today's call, Steve and Scott will provide some brief remarks and then we'll open it up to your questions. I'll now turn the call over to Steve.

Speaker 2

Thank you, TC. Good morning, everyone. Welcome and thank you for joining our call this morning. Today, I'll provide a check-in on our full potential strategy with a review of the areas of the business where we're doing extremely well, where we know we need to do more and where things are challenging right now. Before I dive into that update, I'll begin by touching on our 2nd quarter results.

Speaker 2

After my remarks, I'll turn the call over to Scott to discuss the details of the quarter and our second half outlook. Touching on the quarter's performance, We're pleased that revenue, operating profit and earnings per share were in line with our outlook. We're also pleased that several of our key performance metrics are improving. We delivered 90 basis points of sequential gross margin improvement. We continue to reduce inventory, achieving a year over year reduction of $255,000,000 or 12%.

Speaker 2

We generated positive operating cash flow for the quarter year to date. And because of the strong cash generation, we began paying down debt earlier than expected. U. S Innerwear delivered a strong quarter with results that were ahead of expectations, including sales growth of 3% over last year and 4.40 basis points of sequential margin improvement. On a constant currency basis, international sales were consistent with prior year.

Speaker 2

Growth in Champion Asia and stable performance in Champion Europe Essentially offset the decline in our Australia business, which was driven by a very challenging macroeconomic environment. In U. S. Activewear, sales and operating profit were below our expectations. The combination of soft category dynamics And the near term impact from our strategic brand related actions continue to weigh on U.

Speaker 2

S. Champion sales. Looking at the rest of the year, The headwinds impacting our Australia and U. S. Activewear businesses have increased, which is the primary driver for our adjusted outlook for the second half.

Speaker 2

That said, we remain on track for strong margin recovery and we expect to exit the year with gross margin in the high 30% range To generate $500,000,000 of operating cash flow and to pay down more than $400,000,000 of debt. Now I'd like to provide a progress check-in on our initiatives that are part of our full potential plan, beginning with our Champion business. Champion is a great brand. It is over 80% domestic and 65% global awareness and a significant global growth opportunity. We've made solid progress on improving the operations and processes within the Champion business that position us for future growth.

Speaker 2

However, The timing of these actions translating to financial results has been mixed. In Asia, where the brand is the most advanced In terms of product and channel segmentation, we're experiencing strong growth. In Japan, the combination of new product launches and the ramp up of our loyalty program are driving strength in our retail business. And in China, we continue to work with our partners to open new stores, launch new footwear franchises And develop localized product and marketing to build a strong foundation for future growth. In Europe, despite the macroeconomic headwinds, The business is stable.

Speaker 2

We've seen solid performance within our retail business. Our footwear business continues to build momentum and we're leveraging our global scale by bringing our top performing styles to the U. S. This performance is balanced against the headwinds we're seeing in wholesale as retailers Take a more cautious approach to fallwinter orders. In the U.

Speaker 2

S, Champion is not where we expected to be at this point in time. This is clear in our results and our outlook. And as a result, we're actively taking steps that we believe will drive the long term success of the brand. We brought in new leadership, which is driving new talent in design, merchandising and sales. We've coordinated and launched our new brand purpose Champion a better tomorrow.

Speaker 2

We've completed our first full global product line from the new team, which is based on our disciplined global segmentation approach and will be available for the 2024 fall winter selling season. In total, nearly 1 third of our 2024 product And fabric platforms will be global versus 0 today. This will reduce SKU complexity and drive additional cost savings beginning next year. We've streamlined our supply chain operations, including balancing third party sourcing and internal manufacturing, consolidating sourcing partners And shifting to dedicated Champion DCs. And we're taking necessary steps of shifting our channel mix in the U.

Speaker 2

S. This is a big initiative that is taking longer than expected due to the category and channel inventory headwinds. It's the right thing to do for the brand the long term and we're receiving very positive feedback from our retail partners. In addition to the natural margin recovery we expect next year From lower input costs and the benefits of using global product platforms, we've also taken recent additional actions to improve Champion's performance in the U. S.

Speaker 2

We quickly opened 7 pop up Champion stores to move through excess inventory in a way that preserves margins and brand equity. We've established partnerships with industry leading licensees for kids apparel and outerwear with the potential for additional categories. We're also beginning to leverage our successful performance in the Collegiate channel by using our quick turn graphics capabilities to drive incremental revenue opportunities in our wholesale business. We're doing a lot to position Champion for success. We're making progress and we're continuing to adapt to the environment.

Speaker 2

We remain highly confident in the potential of the brand. However, we expect Champion sales in the U. S. Continue to be pressured throughout the rest of the year. Turning to Innerwear.

Speaker 2

Our U. S. Business is on track and reflects the execution of our full potential strategy. If you recall, the goal was to take a consistently declining business and return it to growth. And we're seeing this play out as we're connecting our brands with younger consumers And regaining momentum.

Speaker 2

Consumer focused innovation is up 30% over last year. Our innovation pipeline is full, providing us visibility to new product launches through 2025, including the launch of M by Maidenform this fall. We're telling our brand and product stories as well as supporting our innovation launches, such as our recent nationwide campaign for Hanes Originals. We've increased our back to school presence with a 9% increase in off shelf displays, and we gained permanent retail shelf space from another national brand that will set this fall. Our supply chain segmentation work has driven a focus on less inventory, fewer, more profitable SKUs, improved efficiencies in our DCs and reduced product delivery times from Asia by over 40%.

Speaker 2

We're also leveraging data analytics to help our retail partners improve Innerwear on shelf availability to drive sales and make more efficient inventory investments. And we're executing a thoughtful long term pricing philosophy that That ensures a winning brand proposition by differentiating our brands, enabling shelf space gains and delivering value for our consumers and our retail partners. With respect to our international Innerwear operations, as I previously mentioned, Australia continues to face headwinds as higher interest rates are significantly weighing on consumer spending in our categories. Despite their macro challenges, the team is doing an outstanding job and continues to make progress on executing our long term strategy. We continue to bring innovation to market.

Speaker 2

Our innovation products are performing above our expectations led by the lineup of Bond's absorbency products. We're delivering value to the consumer and most importantly, we've gained market share. We believe our business in Australia is very well positioned to return to growth once the macro pressures ease. Taking a step back, from the outset, full potential has been about leveraging our iconic brands and competitive advantages, simplifying all aspects of the business And focusing on the biggest growth opportunities, and this remains true today. We're making progress in many areas.

Speaker 2

Innerwear is regaining momentum. Gross margins improved 90 basis points sequentially as previously discussed. We're on track for strong margin recovery and we expect to exit the year Gross margin in the high 30% range as inflation continues to roll off our balance sheet. We continue to make structural changes to our agile supply chain and organization as well as take costs out of the business. The most recent example is after a broad review of our global operations, We reorganized and relocated approximately 250 corporate roles to leverage our talent pools outside the U.

Speaker 2

S, Standardized processes and reduced expenses by approximately $15,000,000 Furthermore, we're unlocking working capital deliver $500,000,000 of operating cash flow for the year. And we're on track to reduce debt by more than $400,000,000 this year With approximately $100,000,000 already paid down in the Q2. We're proud of these achievements, But there's work left to be done and we're taking action. In addition to the steps I referenced for U. S.

Speaker 2

Champion, we're identifying additional cost savings initiatives We're also actively looking across the business at additional options to enhance shareholder value. This includes options to address our debt, to further simplify the business and to accelerate revenue growth and margin improvement. Before I turn the call over to Scott, I'd like to take a moment to congratulate him on his appointment to CFO that we announced a few weeks ago. Scott did an excellent job as our Interim CFO, and I want to thank him for his hard work and dedication. He's a great partner, and I look forward to continuing to work together.

Speaker 2

And with that, I'll hand the call to Scott.

Speaker 3

Thanks, Steve. For today's call, I'll touch on the highlights from the quarter and then provide some thoughts on our second half outlook. For additional details on the quarter's results and our guidance, I'll point you to our news release and FAQ document. We delivered solid results for the quarter despite the increasingly challenged consumer environments in Australia and the activewear apparel market in the U. S.

Speaker 3

Revenue, operating profit, EPS as well as gross and operating margins were all in line with our outlook. What stood out to me in the quarter's results With the continued progress that we made on reducing inventory and unlocking working capital, we generated another quarter of positive operating cash flow in a period that typically uses cash. The continued positive cash generation allowed us to begin our commitment To use free cash flow to pay down debt earlier than expected. Turning to the details of the quarter. Sales were $1,400,000,000 A decline of 5% versus prior year.

Speaker 3

Excluding the 120 basis point headwind from the impact of foreign exchange rates, constant currency sales Touching briefly on our segments, sales in our U. S. Innerwear segment increased 3% over prior year and we're ahead of our expectation. Despite continued softness in apparel spending, we were able to gain market share Behind the launch of our Hanes Originals product, our increased presence for back to school and our ability to leverage our digital tools. We believe we are well positioned to continue to gain market share going forward, driven by the launch of our next innovation and by Maidenform in the fall, Our second half retail space gains and our robust innovation pipeline, which provides us new product visibility through 2025.

Speaker 3

Looking at U. S. Activewear, 2nd quarter sales declined 19% compared to last year as Champion sales continue to be impacted by the combination of challenging category dynamics and the strategic brand related actions we're taking to drive stronger brand health Through a more disciplined channel and product segmentation approach. And with respect to our international business, constant currency sales were consistent with prior year. Growth in Champion in Asia, interwear growth in the Americas and stable performance in Champion Europe essentially offset the macro driven slowdown in Australia.

Speaker 3

Turning to margins. Adjusted gross margin of 33.6% was in line with our expectation. As compared to Q1, adjusted gross margin increased 90 basis points sequentially. As compared to last year, The decline is 425 basis points driven by the previously incurred higher input costs that are rolling off our balance sheet as well as the impact from business mix including lower DTC sales in the quarter. These headwinds more than offset lower airfreight expense and the benefit from cost savings.

Speaker 3

With respect to SG and A expense, we levered by 20 basis points as compared to last year, which was ahead of our outlook As we remain disciplined in our choices in this challenging environment, the year over year improvement was driven by the benefits from our cost savings initiatives, This resulted in an adjusted operating margin of 6.1% for the quarter, which was at the high end of our outlook. Looking at the remainder of the P and L, interest and other expenses, tax expense and earnings per share are all in line with our outlook for the quarter. Turning to our balance sheet and cash flow. We continue to see the benefits from our ongoing inventory discipline and the actions we took late last For the quarter, inventory declined 7% sequentially and declined 12% or $255,000,000 as compared to last year. We also generated $88,000,000 of operating cash flow in the quarter, bringing year to date operating cash flow to $132,000,000 With respect to our debt, we paid down nearly $100,000,000 in the quarter.

Speaker 3

Our leverage was 5.6 times on a net debt to adjusted EBITDA basis, which was below our Q2 covenant of 7.25 times. We remain committed to using all our free cash flow to pay down debt. And now turning to guidance. We updated our full year outlook to reflect the increased headwinds we're experiencing in our Australia and These headwinds are being partially offset by the strength in our U. S.

Speaker 3

In order business. Continue to expect year over year margin improvement in the second half, particularly in the Q4 as we began selling lower cost inventory and we anniversary last We've been manufacturing product for several months at gross margin levels that are in line with 2021 early 2022. This gives us visibility and the confidence that we are still on track to exit the year at meaningfully higher margin run rates. For the full year, we expect net sales of $5,800,000,000 to $5,900,000,000 adjusted operating profit $425,000,000 to $475,000,000 adjusting earnings per share of $0.16 to 0 point 3 0 Operating cash flow of approximately $500,000,000 and free cash flow of approximately $450,000,000 Our working capital initiatives are performing above our initial expectations, particularly our actions to reduce This is offsetting the lower profit outlook as it relates to full year operating cash flow. As it relates to free cash flow for the year, We continue to expect to be able to pay down more than $400,000,000 of debt this year, with nearly $100,000,000 already paid down in the 2nd quarter.

Speaker 3

With respect to our outlook for the Q3, at the midpoint, we expect net sales to decline slightly less than 8% On both the constant currency and reported basis, for adjusted operating profit, we are guiding to a range of $130,000,000 to $150,000,000 As we expect continued sequential improvement in margins through the year, we expect interest and other expense to be approximately $80,000,000 Tax expense of approximately $25,000,000 and adjusted EPS to range between $0.07 and $0.13

Speaker 4

So in closing,

Speaker 3

we are continuing to adapt to the changing consumer landscape. We're making progress in a number of areas and we're taking action to improve in the areas that are challenging. U. S. Innerwear is regaining momentum.

Speaker 3

U. S. Activewear's challenges are persistent, And we are taking additional actions to stabilize margins and position the business to return to top line growth. Our international business Overall, it's stable and we're well positioned to return to growth in Australia once the macroeconomic pressures ease. We delivered solid second quarter results.

Speaker 3

Our margins are improving sequentially as we communicated last quarter with good visibility Continued margin improvement in the 3rd and 4th quarter. We are generating cash and we're paying down debt. And with that, I'll turn the call over to T. C.

Speaker 1

Thanks, Scott. Before we open up the call for questions, we want to briefly address A letter that was publicly issued by one of our shareholders earlier this week. As you likely saw, we issued a statement in response the same day. That said, we're here today to talk about our Q2 2023 results and outlook. Given that, we won't be commenting further on our engagement with this shareholder today and appreciate you keeping your questions focused on our results and outlook.

Speaker 1

I'll now turn the call back over to the operator to begin the question and answer session. Operator?

Operator

Our first question comes from the line of Jay Sole with UBS. Jay, your line is now open.

Speaker 5

Great. Thank you so much. Steve, that was a lot of very Commentary in the prepared remarks, but can you really just take us inside the Champion brand a little bit more? Give us an idea of where things stand right now in just terms of Brand momentum of the world, the product, where you see the product going and what it's going to take to get to the growth rates that you envision for the brand?

Speaker 2

Sure. Good morning, Jay. As I said in my remarks, I still see a lot of really great significant global opportunities. We've got really strong global awareness and it's a really unique brand around the world. And I think we've made a lot of progress improving in terms of the operations, the processes, really position the brand for the future.

Speaker 2

We've talked about new leadership that's moving with breakneck speed. We've launched a new global purpose, which is our champion better tomorrow. We're launching our 1st global product offering, which will be available fallwinter next year, the selling season, global product platforms, which we've talked about before, which are going to Really drive cost out of the system. We're simplifying complexity in the brand. I'm excited about the supply chain opportunities that have been created.

Speaker 2

We're More efficient, we're going to drive more cost savings, we're going to be faster and more flexible than we've been in the past. But clearly, financial results have been mixed. There's obviously no doubt about that. Globally, internationally, the brand is doing okay. And it's running Good in Asia.

Speaker 2

We're seeing growth there. Our product in Japan is resonating. Some of the new co labs in particularly Are really working well with the local consumer. China, we're getting started and we're doing well. Our key partners are making significant investment behind the brand They believe in it with new stores getting excited about the footwear line.

Speaker 2

The business in Europe is holding ground, tough market, Challenging consumer there. Our retail is performing well, particularly in our footwear business, but we are seeing headwinds in wholesale that Could be a bit of a headwind in the second half. But fundamentally, the challenge we have is the U. S. And that's the brand is not where we expected it to be at this point.

Speaker 2

Sales are going to remain pressured through the back half of this year. And fundamentally, we have to improve our product segmentation. We have to improve our product performance. We're seeing soft POS right now in a challenging category as we go forward. That's the work that we need to do that we really need to focus on.

Speaker 2

But good news is the brand continues to resonate. We're taking some new action. We've created new pop up stores to move through inventory. We're expanding the categories that we're focused on with the brand in kids and outerwear with new licensees. And we're getting good feedback on our new products that's coming out next year.

Speaker 2

We continue to see good momentum with in the collegiate channel with that younger consumer. And we're going to get some really strong natural margin recovery Next year as inflation starts to ease. So a good strong kind of global footprint, it's going to take time in the U.

Speaker 1

S, But I feel like we're moving in

Speaker 2

the right direction, but it is taking us longer than we initially anticipated. But I'm confident we're working on the right things.

Speaker 5

Got it. Well, that's really helpful. Thank you, Steve.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Ike Boruchow with Wells Fargo.

Speaker 6

Hey, good morning guys. I guess, question is on the gross margin. So can you elaborate a little bit more on the exiting of the year in the high 30s? Is that kind of the run rate you expect into next And then I guess to that point, what I would love maybe Steve, some of your high level views on is with Cotton and AUC coming down, how do you think about pricing within the Innerwear business into next year? Do you think about I mean, you've worked at some of these big partners.

Speaker 6

Do you think that they view that as an opportunity to actually take pricing down Within their own private label to drive value, like how do you kind of see pricing playing out next year with cost deflation, starting to impact, that core Innerwear business? Thank you.

Speaker 3

Hey, good morning. I'll take your margin question and thanks for your question. So on gross margins, very pleased with the progress that we're making this year. We Saw a second quarter margin improvement of around 90 basis points over the Q1. So we feel very confident about our ability to return to Turn to that high 30% gross margin rate.

Speaker 3

As we exit the year, we have good visibility, the significantly lower costs that are running through our supply chain today. In fact, the products that are running through our supply chain are at gross margins in line with 2021 And early 2022, input costs have come down significantly. For example, cotton costs, they're down nearly 40% year over year And stable since the Q1. Freight costs, they're down significantly. For example, ocean freight container lines are down up 80% year over year.

Speaker 3

And you can also see that on the balance sheet. Raw materials, work in process balances are down about 26% year over year. So Seeing that play out, and what we're seeing in the manufacturing facilities and also seeing on the balance sheet. So it's really just a matter of time before That flows through the P and L. And so I see second quarter as an inflection point.

Speaker 3

You're going to see a continued sequential improvement of margin rates Over the 3rd Q4, and so again, by the time you get to that 4th quarter, you're going to be in that high 30% range, 37% to 39%. And if you use that midpoint, Just as an example, you're asking about kind of going forward, we're not giving guidance for 2024. But just using that midpoint of the 4th quarter gross margin rate in that high thirty And we've what we have visibility to. If you just simply apply that to the expected sales that we're going to see in 2023, That's an incremental $200,000,000 of cost coming out of the P and L into next year. So we feel really good about that progress and what we're going to see.

Speaker 2

Yes. Yes. Just excited to see that and I think it's good progress and it's going to make a difference in the business. So to talk about your second part of your question around pricing, let me share the first How I think about pricing and kind of pricing philosophy that I think is really important to make sure we have winning brand propositions in the long run. How do we differentiate our brands?

Speaker 2

How do we continually gain shelf space, make sure we're delivering value to our consumers and to our retail partners And we fit well into their construct of how they build their categories at the shelf every day. We take a consumer driven approach And we always put the consumer at the center of how we think about pricing. Our plan over time is to grow space and to grow our shares. Diligent obviously about price gaps to do that. We're focusing on really making sure that we both on the Top line and the bottom line and how we think about the business in the long run over the next couple of years.

Speaker 2

Obviously, there are short term variations that need to be managed as we go through there and things can get disrupted. But we're always going to put the consumer at the center of how we do it. Now there's different ways of taking pricing Managing price, certainly innovation is one we can do that, which I mentioned in my remarks. I'm excited about the innovation that's coming. All of it is accretive To our current pricing position to our margin and we're thinking about margin accretion for all innovation that comes forward, which is one way for us to do it.

Speaker 2

And we're reaching new customers As we do that, we said we need to get younger with our brands and we are getting younger. TSP was an example of that. Originals is accomplishing that. We're excited about M for Maidenform is going to accomplish that and all have specific pricing strategies. To answer your question directly, do I see pricing coming down and the need to reduce pricing?

Speaker 2

No. When you look at private label share, in Innerwear, private label share is down year over year. So I think we're doing a good job of managing those price gaps And we'll continue to obviously watch it closely. We did not price for peak inflation, which obviously put some pressure on us in the short term Back to our pricing philosophy and what I think is in the long run, but I think we're set up well and positioned well on price as we go forward. We've been thoughtful about that in back to school this year and how we position price versus margin.

Speaker 2

So I think our pricing position is good in the market. I I think we're going to have more flexibility next year with the gross margin improvement that Scott just talked about, but I don't see us necessarily needing to go backwards on price at this point. Our price

Operator

Our next question comes from the line of Paul Lejuez with Citi.

Speaker 4

Hey, everyone. This is Brandon Cheatham on for Paul. Thanks for taking our question. I was wondering if we could dig in on the Activewear channel. Do you get a sense when that channel may have worked through that excess inventory?

Speaker 4

I was wondering if you could expand on the channels that Stock distribution with, but is that really focused on kind of like the off price clearance related distribution or is it broader than that? And How does that change? How you go to production for the Champion brand and the long term potential for that brand?

Speaker 2

Sure. Good morning. Couple of pieces there and if I don't cover them all, let me know. When you think about the channels, you think about Activewear in general, There's still inventory out there in the channels. So I think it's slowing things down and causing some pressure.

Speaker 2

If you look at the recent growth in the Activewear channel, it's Declining and that's been accelerating right now. Some of that is driven to the backup in inventory right now. Now we've taken a lot of inventory actions That positioned us extremely well to manage through the slowdown in the channel. If you remember last year, the time out that we took, We moved quickly to take action against inventory, which I think positions us well this year. Our inventory year to date On a comparison basis, we're down 12% or over $250,000,000 in inventory.

Speaker 2

So we've managed it very tightly and thoughtfully So that we're well positioned to deal with the challenges in the market right now. And our year end target is going to be down significantly. We're targeting about $1,500,000,000 of inventory at the end So we feel like we're in good shape on inventory to manage through the complexities of the channels that are out there. In terms of the channels that we're moving, it's more about balancing the mix of channels more than exiting channels directly. We are really working on a very specific channel segmentation strategy and having a strong discipline behind that segmentation strategy.

Speaker 2

So you mentioned off price. Off price is an important channel. It plays a key role. It needs to be managed appropriately and have a very purposeful strategic role. And if we do that across all our categories, I think we're going to be in good shape.

Speaker 2

I would tell you a couple of years ago, I think we got away from that. We weren't disciplined and we weren't thoughtful enough in individual channels. Now we're putting a very clear model in place to understand what product goes where, when. And if we do that, I think we'll be very effective. That has been well received by all of our retail partners.

Speaker 2

Very clear with them on what we're doing, how we're doing it, the product that they should expect and how that relationship should work. And they agree with it and we should be in good shape. It's Just taking us time to get there. Very

Speaker 4

helpful. Thank you.

Speaker 2

Thank you.

Speaker 4

If I could, just one follow-up on the covenants. Can you remind us where those are for the remainder of the year? Do you think you need to do any more work there? Thanks.

Speaker 3

Good morning. Thanks for your question there. So for our covenants, we're in a good position with our financial covenants. We've made really good progress this year Yes, in a number of areas that really put us in a good place. Like we talked about earlier, we've generated over $130,000,000 of operating cash flow.

Speaker 3

We continue to expect $500,000,000 of operating cash flow or about $450,000,000 of free cash flow for the year, which is more in line with our historical levels. We've already paid down $100,000,000 in debt and we expect to pay another $300,000,000 or more $1,000,000 of debt in the second half. That puts us in a better leverage position, but also helps reduce interest costs. And keep in mind, not covenants, but just keep in mind our liquidity, we have about $1,000,000,000 of So we're in a good place there. And we talked about earlier about the margin improvement over the back half of the year.

Speaker 3

SG and A, we anticipate that we're going to have about $70,000,000 of reduced SG and A cost this year. And we've already seen $42,000,000 of that in the first half. So with all that said, we are obviously tightly managing our cost and spending in this environment. And we are being very prudent with our investments And our spending there, we're balancing near term challenges with long term opportunities. And we're not done.

Speaker 3

There's other opportunities that we're actively seeking. So Our current outlook factors in a kind of muted consumer environment. But if it gets more challenging, that's in our outlook. I think we're a global company, a diverse company. There are a number of actions and levers that we can take to preserve cash flow and stay in compliance with our covenants.

Speaker 3

We'll take those actions as we need to.

Speaker 4

Got it. Thanks a lot and good luck.

Operator

Our next question comes from the line of Paul Kearney with Barclays.

Speaker 7

Good morning. Thanks for taking my question. 2, I'm wondering if you can comment on the performance of the Champion brand By channel specifically, I'm interested in whether it's outperforming in anywhere or in The mid tier department store in particular. And then second, I'm wondering if you're viewing some of the difficulties in the brand today as a result of Kind of promotional activity within athletic apparel? Thanks.

Speaker 2

Sure. In terms of the second one in terms of Promotional apparel. It is certainly getting a little more promotional out there. It ties back to what I was saying earlier about the inventory position In the channel, in the category in general, people are still trying to clear inventory. That's why again, we worked so hard on our inventory to get it to a much better place So we weren't sitting on it as the category slowed down, but there certainly is some increased promotional activity that has caused some challenges out there.

Speaker 2

And that's on a global basis. We're seeing that we've mentioned we called out Australia and the challenges that Australia is having Right now, driven by interest rates, certainly a more promotional environment there right now, but consumer a bit slow to respond. That business will recover. It's a strong business. It's a great business.

Speaker 2

Champions are growing brand there and we're encouraged about where it could go as we go forward. As you think we don't really comment on specific channels, how we're doing it. But again, we're thinking about the business globally. In retail, we're doing well. In Japan, in China and Europe, it's the U.

Speaker 2

S. That remains challenged across channels. Except the Collegiate channel, which I mentioned earlier, we continue to do well. Young student on campus continues to choose Champion, which is continued growth story, which is Exciting for us, but there's definitely headwinds out there and we're balancing it not only globally, but across all of our channels.

Speaker 7

Great. Thank you.

Operator

Our next question comes from the line of Tom Nikic with Wedbush

Speaker 8

Hey, good morning. Thanks for taking my question. I apologize if you gave this already, but can you tell us how we should think about the growth rates for the different segments,

Speaker 2

both for Q3 and for the full year? Yes. We don't guide specifically by segment, but I can give you just kind Just give you a little bit of color for Q3 and for the back half of the year. So if you think about Innerwear, Good momentum in that business, against the declining category. So we talk a lot about activewear declining and where it's continuing to decline a little But I continue to see some momentum in Innerwear and continue to gain share in the back half as we launch new products.

Speaker 2

So Think about the Innerwear business in Q3 roughly as flat, but picking up a lot of momentum In Q4 as the comps get a lot easier and as innovation ramps and as new product sets For us new space sets, excuse me, for us as we go forward. International, has continued to have puts and takes Across the world, I expect Australia to remain challenging. And again, that's market driven. Again, I think that business is a great business, But it's going to be challenged. I think we'll continue to see good growth in Asia.

Speaker 2

And as that business continues to perform, I think we'll continue to do well there as we go forward. Activewear, as we mentioned in our call, I think it's going to be the challenge as we go forward, really driven by domestic champion, We'll continue to be a headwind in the back half of the year.

Speaker 8

Got it. Thanks very much. Best of luck for the rest of

Speaker 2

the year.

Operator

Our next question comes from the line of William Reuter with Bank of America.

Speaker 9

Hi, good morning. So the first question, did you say earlier that there would be $200,000,000 of costs coming out of the P and L in terms of lower input costs For 2024, if inputs remain at the levels you see them in the back half of the year?

Speaker 2

Yes. So, let me Scott mentioned it earlier. If you think about the high 30s run rate that we expect to come out of the year If you take that run rate and just apply it to call it flat sales next year, That equates to basically $200,000,000 improvement in gross margin. So we've been fighting through the gross margin challenge with the inflated cost For a number of quarters now, but we're getting to the end of that. Q3 gross margin will start to improve versus year ago for quarter for the first time in a long time.

Speaker 2

And then you're going to see a big step up in Q4. As we see we have clear visibility to what those product costs are and how that We'll flow the balance sheet into the P and L. And if you just straight line that out into next year, you're going to look at about $200,000,000 of improved Cost position for 2024.

Speaker 9

Great. And then my second question is, there have been some questions that Comments that imply that the Champion brand may have been hurt by distribution through off price channels. How much of the Champion sales have been To off price historically, and I guess do you have a goal for where that may be?

Speaker 2

Yes. We don't give a specific number by channel and Share channel mix. What I would tell you is there's an off price channel, there's different definitions of different channels. So if you Think about where we want to play. We want to have a very clear structured part of the business.

Speaker 2

We have a good business In off price today and we'll continue to have a good business in off price as we go forward. It's the mix that we need to manage Between off price, department store, sporting goods channel, the online businesses that we have that we want to balance very So it's how much in each channel and maybe more importantly, what product in which channels and be incredibly purposeful about that. That's a big part of the strategy and that's a pivot from where the brand was a few years ago and it takes some time to implement.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Carla Casella with JPMorgan.

Speaker 10

Hi. Just one clarification question. You talked about the collegiate Can you talk about how big that is overall business? And is that an opportunity beyond Champion?

Speaker 2

We actually have some other brands in the Collegiate channel already. Our alternative brand, Haynes plays a small role in that business. So we think of it as an opportunity to grow. Again, it's where we resonate well. We go to market there.

Speaker 2

We have a bit of a unique way of building that business as we go forward. We don't share the specific size of that business As we go forward, but it's a business that's continuing to grow and it's a business that we think has is a good marketing vehicle For us as we go forward, but it's a sizable piece of the business, and More than a couple of $100,000,000 in size.

Speaker 10

Okay. And then On the pop ups, can you give us a sense for how long you expect to have pop ups open, how many and then maybe or how much of your inventory Is slated to move through there?

Speaker 2

Sure. We've opened 7 of them right now, And they'll stay open or continue to grow and continue to increase depending upon performance. It's just a couple of weeks right now, but off to a good start. Team did an amazing job of moving with pace to get them open quickly to find really attractive leases As we start to move inventory through them. So we'll have to see how the performance is.

Speaker 2

I'm optimistic about inventory that they can move And increased presence of the brand. Again, getting brand out in front of people, putting good quality inventory in there, Maintaining pricing as we do this is going to be important for us and I think that's how we're executing it right now. And we'll open as many as we can depending upon performance and finding the right appropriate lease locations.

Speaker 10

Okay, great. And those will be through year end? Or is that something you could do on an annual basis?

Speaker 2

Yes. Some of the leases vary, and they're opportunistic as you go forward, but I would expect them to at least be open through year end. And then we could open more, we could extend them, depending upon performance as it plays out.

Operator

Our next question comes from the line of Hale Holden With Barclays.

Speaker 11

And additional options to address debt and further simplify the business Some options around the business. And I was wondering if that might include divestitures to accelerate that pay down.

Speaker 2

Hey, Hale, we missed the first part of your question. Could you start over? I'm sorry.

Speaker 11

Yes, no problem. You made the comment in the script that You're looking at additional options to address debt or further simplify the business. And I was wondering if that might include divestitures.

Speaker 2

Yes. Thanks for the question. We're always looking to pressure test our strategy, checking ourselves to make sure that we're Taking the right actions for the business for our shareholders as times change. And as you mentioned in my remarks, I said, we're looking for new ways to improve performance. That could include options to address debt, further simplify the business, looking for things to accelerate revenue growth and improvement.

Speaker 2

No specifics at this time, but we're considering the options that are out there.

Speaker 11

Great. Thanks so much.

Operator

That concludes today's question and answer session. I'd like to turn the call back to D. C. Robillard for closing remarks.

Speaker 1

We'd like to thank everyone for attending our call today and we look forward to speaking with you soon. Have a great

Operator

day. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Hanesbrands Q2 2023
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